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Early Childhood Education Funding Paid to Parents.
By Dr Sarah Alexander.  
December 18, 2012 

In November 2012 German politicians voted in a new childcare/ECE benefit programme that will financially help parents who stay at home to be their child’s carer/educator instead of using government subsidised childcare.

This has happened at a time when the German Chancellor Angela Merkel’s government has been urging other European nations to rein in spending and cut back public debt. It demonstrates support for parents to have a real choice as to whether to have a paid job and put their child into childcare/ECE or be their child’s full-time carer and educator. 

Families where one parent stays at home will receive €100 a month under the programme, increasing to €150 a month from 2014 onward.

lunch time

The proposal was met with harsh criticism by the opposition and business leaders but the law passed with a vote of 310 to 282, with two abstentions.

It has been reported in the media that the centre-left opposition is critical because they say the money should be used to create more early childhood centres and increase children’s participation in early childhood education. They say parents should not be paid not to use state funded early childhood programmes. German business leaders argue it could delay parents’ entry into the workforce for longer and deprive the German economy of valuable workforce.

From a purely economic viewpoint the subsidy does not make sense.  But from an ethical, educational and social development perspective it does make sense.  It is argued by supporters of the policy that it is not a question of giving parents money not to use childcare/ECE, but one of fairness and free choice in terms of care.


A large body of research points to the price and availability of childcare being important factors for increasing women’s labour force participation. A common belief in developed countries is that government funding of regulated-quality childcare makes it easier for mothers to re-enter paid employment earlier and substitutes for less reliable and lower quality informal care options such as care by babysitters and neighbours.  

A major empirical study published in 2012 sheds new light on our understandings of how female labour supply is linked to childcare availability and price.

It reports on an investigation of a reform that saw the parents of 2-year-old children receiving a subsidy effectively giving them a financial choice to care for their child at home or utilise a formal early childhood facility, and what the various impacts of this reform were on:

  1. childcare choices;
  2. older siblings;
  3. female labour supply and fertility;
  4. male labour supply;
  5. economically disadvantaged and vulnerable families; and
  6. children’s development.

The following sections present key parts of the research and summarise the written report.

The Funding Paid to Parents Policy

The “Betreuungsgeld”, a new policy for families with 2-year-old children, was introduced in 2006 by the Government in Thuringia, Germany.  The policy was to give families greater choice in childcare through receiving a monthly subsidy if they chose not to use a government subsidised early childhood centre.  If the family chose to use a government subsidised early childhood centre then the amount they received decreased in line with the hours of formal childcare they used as this money then went to the centre.  The full amount of the subsidy went to the early childhood centre and the responsible parent received no subsidy payment if the child attended formal childcare full-time (defined as 45 hours).

The subsidy amount was 150 euros per month for firstborn 2-year-old children, increasing to 200 euros for the second born eligible child, 250 euros for the third born eligible child and 300 euros for each fourth and subsequent eligible child.

Considering that parents in Thuringia paid an average of 80 euros a month in early childhood service fees, the new subsidy effectively represented a price increase – or a tax on parents for using a government subsidised early childhood service.  The compensated price effect was therefore non-positive meaning parents would lose money by continuing their child’s early childhood service attendance. Early childhood centres stood to gain because whereas they were receiving an average of 80 euros per full-time child attending, the new subsidy increased this to 150 euros.  However, the payments received by centres were offset by less funding from the state budget.  

The new subsidy contributed a “non-trivial” share to the average household income of families.  It made up on average about 10% of the median disposable income of families in the study sample of East Germany.  The share was larger for single parents, low income families and low-skilled parents.  For example, the subsidy made up as much as 29% of disposable household income for low-skilled parents with four children.  

The new subsidy replaced an earlier one which was means-tested (adjusted according to family income) and paid to families if at least one parent worked less than 30 hours per week and the monthly household income was below a threshold amount.  The old subsidy was paid to parents regardless of parents’ childcare choices.  Under the new subsidy rules all families with eligible children received an amount which is independent of income and this was adjusted depending upon the family’s childcare choices and hours of attendance by the eligible child at a formal government subsidised early childhood centre.

The study authors, Gathmann and Sass, note that many of the mothers of children who attend early childhood centres are not employed.  In West Germany, for example, this is around 30% of mothers.  The new policy therefore may be seen to be an encouragement for mothers not in employment to spend more time with their child.

The Context of Early Childhood Provision

For-profit early childhood centres are rare in East Germany.  Most centres are provided by local communities, the Catholic or Protestant churches and non-profit organisations.

Most of the costs of running a centre are met by the local or state governments.  Revenue from parent fees is small, contributing overall only about 18% to the running costs.

There is no shortage of early childhood places in Thuringia.  In each county of Thuringia childcare places supplied exceed the number of children attending by around 14%.

Around 87% of 3 – 4 year olds attend a public early childhood centre in East Germany. Specifically in Thuringia, approximately 75% of 2-year olds attend a publicly subsidised childcare centre.

The Study

The German Socio-Economic Panel (GSOEP) annually surveys around 12,000 families on their childcare choices, parent employment, income and family structure.  Data was drawn from the GSOEP for analysis of the effect of the new policy for the period from 2000 to 2009 on roughly 3,000 households from East Germany (without East Berlin as income levels and childcare provisions differ substantially between East and West Germany.  The analysis included all children in East Germany with one or more children aged 1 or 2 years old. 

To analyse the effects of the new policy on children’s development the study drew on supplementary data collected by way of a questionnaire to mothers with children born in 2003 or later to assess the health, cognitive and non-cognitive skills of her child. Mothers are asked to assess their child’s motor skills, language ability, social skills and skills in daily activities and for each question is asked to assess whether the child is able, not able or only partly able to carry out tasks, such as drawing recognisable figures.

German Micro Census data was used to study labour supply responses to the new policy. The Micro Census is an annual cross-sectional survey of a random 1% sample of the German population. A person is classified as not being in the labour market if she/he is unemployed, out of the labour force or on parental leave. As with the GSOEP, analysis was restricted to households in East Germany and families with one or more children aged 1 or 2 years old.   

Complex and thorough statistical analysis was performed on the data. This included controlling for child, parent and household characteristics such as the number of children under the age of 1-year in the household. The behaviour of parents with eligible children in Thuringia was examined relative to the choices of parents with children of the same age in other East German states. State specific level differences and trends were tested for. Standard errors are reported, the research analysis appears to be reasonably robust, and one may have confidence that the study’s conclusions match the data.

Empirical Results

1.      Effect on childcare choices

After the new policy was introduced the use of publicly subsidised formal childcare dropped by about 11 percentage points – this included both part-time and full-time attendance.

The demand for informal care (e.g. by relatives, neighbours and friends) dropped by about 25 percentage points. The effect was confined to informal care that was not paid for, as little change in the use of paid informal carers, e.g.  home-based caregivers or private nannies occurred.  This suggests that subsidised formal childcare and unpaid informal childcare are complements – when parents use fewer hours of formal childcare they also have less need for help from relatives and others to cover their full working hours.

Mirroring the decline of subsidised centre-based childcare and unpaid informal childcare use there was a strong increase in childcare provided within the family at home – an increase of 9.1 percentage points. The implied effect sees the total share of parents within the study sample who rely exclusively on childcare within the household increasing by as much as 20%. The positive effect for increased care within the household is the combination of (a) an income effect among parents not using subsidised formal childcare and receiving the subsidy windfall, and (b) a substitution effect from parents switching from formal childcare and doing more of the care themselves in response to the subsidy.

2.      Effect on older siblings

A subsidy for parents who care for their 2-year-old at home also reduced the use of formal childcare for 3-4 year old children in the family.   The study authors note that “this shift may be beneficial for the average child if home care (by the parents) is of higher quality than public or informal childcare.  It could be worse for a child’s development if home care is of low quality, for example, because the child is left alone in the home.” (p. 20).

3.      Effect on female labour supply and fertility

The subsidy was substantial enough to trigger sizeable adjustments in employment, even though the link between maternal employment and the use of formal subsidised government childcare is not very strong in Germany as mothers also use formal childcare for other reasons such as leisure.  Labour force participation rates declined by 11.2 percentage points or 20% with the introduction of the new subsidy policy.

The new policy did not appear to reduce female labour supply permanently.  Two years after the year of eligibility for the subsidy as parents with a 2-year-old, labour force participation rates between mothers in the treatment and the control groups were no longer statistically significant.

Reducing labour force participation when the child was young and providing a subsidy to parents who chose not to use formal subsidised childcare did not have an effect on family size.  No economically or statistically significant effect of the probability of having a new baby in the year of eligibility for the subsidy or the year after was found.

4.      Effect on male labour supply

Among working men in the families eligible for the new subsidy, a small reduction in labour participation rates (about 3 percentage points) was noted but at the same time there was also a small increase in the total number of hours worked (by about 3%).

5.      Effect on economically disadvantaged and vulnerable families 

Differences in responses to the new policy were separately examined for three subgroups:  low-skilled parents, single parents, and low-income households.  All three subgroups reduced their use of formal childcare and substituted this with care within the household and informal childcare.  The increase in informal care is opposite to the response of the whole sample, suggesting that because the subsidy contributes a large share of disposable income for these parents informal childcare necessarily becomes a substitute for formal childcare (and not a complement to formal childcare as for more well-to-do families).

6.      Effect on children’s development

The study provides some “suggestive evidence” of outcomes for children from substituting centre-based and informal childcare with home care. The suggestive evidence comes from the mother’s assessment of her child’s motor skills, language ability, social skills, and skills in daily activities. The results for the whole sample suggest mixed effects – with improvements in some scores such as for social skills and decreases in other scores such as for motor skills. The effect sizes are small and not really meaningful.

Negative effects of the new policy show however for girls, with motor skills and social skills as well as the ability to perform certain daily activities dropping substantially for girls. One interpretation of this finding is that a mother who has more time to spend with her child will report differently on the abilities of the child because she has more time to observe. The change in maternal perspective may affect girls more than boys if mothers spend more time in interaction at home with daughters than sons. Another interpretation may be that the formal childcare centre, staffed predominantly by women, may favour the development of girls abilities and girls who receive less of this added stimulus are observed by their mothers as having lower abilities (in all areas except for language).

The researchers did not look at the likely effects of the new policy on the development of children from vulnerable backgrounds – low-income, single parent and low-skilled or less educated families. Citing experimental studies such as Head Start and the Perry Preschool project the authors propose that the shift away from public childcare centre use to care at home may be harmful for children who are likely to fall behind in their development.

Main Conclusion on Funding Paid to Parents

To quote directly:

“Even beyond the particular German setting, our analysis provides valuable insights into the relationship between childcare, family labour supply and child outcomes. First, our results suggest that public daycare [government subsidised childcare in a centre] and informal care are complements among the average family with small children (and possibly substitutes for low-skilled and single parents and low-income households). In contrast, public daycare and exclusive care by the parents or other household members are substitutes. Second, our evidence suggests that childcare prices alone (net of income effects) are an important determinant of female labour supply in advanced economies. Third, we provide evidence that family policies do not only affect the eligible child but have spill-over effects on other children in the household.” (p. 26).

The full reference for the study is:

Gathmann, C. & Sass, B. (2012). Taxing Childcare: Effects on Family Labor Supply and Children.  Discussion Paper No. 6440.  Bonn: Institute for the Study of Labor (IZA).

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